First Republic Bank in spotlight for US regulators after sale of Credit Suisse

As jittery markets prepare for Monday’s open, the top concern for US officials is First Republic Bank,

FRC -32.80%

which last week required bailout funding from a group of the country’s largest banks. Whether First Republic and other regional lenders stabilize in the coming days will determine whether additional private or government support for banks is needed.

In Switzerland, crumbling trust led to the sale of Credit Suisse for more than $3 billion. Regulators around the world fear that a collapse of Credit Suisse, a systemically important financial institution, could have repercussions for large banks in a number of countries. In the US, the President’s Working Group on Financial Markets, which includes Federal Reserve and Treasury Department officials, met to monitor the situation.

After the Credit Suisse acquisition was announced on Sunday, Treasury Secretary Janet Yellen and Fed Chair Jerome Powell welcomed the deal while trying to reassure US investors. “The capital and liquidity positions of the US banking system are strong and the US financial system is resilient,” the two said in a joint statement.

In the US, First Republic has become the latest pressure point. The stock is down more than 80% in March. According to people familiar with the matter, customers withdrew around $70 billion in deposits, nearly 40% of the total. But withdrawals stabilized on Friday after the country’s biggest banks came to the rescue, people said.

That slowdown and the $30 billion in new deposits from 11 of the largest banks gave First Republic a chance to evaluate its future options.

“First Republic Bank is well positioned to manage short-term deposits,” a bank spokesman said Sunday.

Regulators were also relatively quiet over the weekend, fearing that too much activity after two weeks of intervention in the banking sector would signal too early to nervous markets that the regulatory work done so far has been inadequate. Further action at this point could also deter potential buyers for the troubled bank.

Before the bank bailout, First Republic had discussed other possible solutions, such as a share sale, with consultants. Such options remain on the table, people said. As bankers continued to debate possible next steps this weekend, no deal seemed imminent. First Republic leaders hope to prove the bailout deal stabilized the lender and avoided distress sale prices, the people said.

As the stock fell sharply on Friday and analysts warned the bailout plan hasn’t patched a hole in the bank’s balance sheet, investors and analysts are wondering how stable First Republic is and how long it can last.

Analysts said First Republic has yet to raise funds or sell itself because it is sitting on losses similar to those that helped sink Silicon Valley Bank earlier this month. For example, analysts at Wedbush said each acquirer would need to fill a $13.5 billion capital shortfall at First Republic.

On Sunday, S&P Global Ratings downgraded First Republic’s credit rating for the second time in the past week.

How First Republic performs in the markets could determine whether the largest banks, including JPMorgan Chase & Co., Bank of America corp

Citigroup inc

and Wells Fargo & Co. managed to contain the panic that gripped the banking system this month. And it will play a role in how the market turmoil ultimately affects broader economic activity.

Market reaction to developments at First Republic and Credit Suisse could influence how the Federal Reserve approaches its rate-setting meeting this week, where officials face a delicately balanced decision on whether or not to raise rates by a quarter of a point should forego an increase altogether.

Fed officials have been rushing to raise interest rates in an attempt to slow the economy and fight inflation by tightening financial conditions, such as raising lending rates and depressing asset prices. A key question at their two-day meeting, which ends Wednesday, is how much additional tightening they expect from the market turmoil and the banking sector.

Central bank officials, who say financial conditions are at greater risk of abrupt tightening owing to the bank shock, may prefer to hold their benchmark interest rate steady, which currently ranges between 4.5% and 4.75%. Those who see the impact as more temporary, limited or modest might argue that with inflation still high, pushing ahead with the next rate hike aimed at cooling the economy.

Meanwhile, the Fed, Federal Deposit Insurance Corp. and the Biden administration continue to question whether and when they may need to seek further assistance to the banking sector, particularly smaller lenders.

For now, regulators have been inclined to wait and see how First Republic and its peers fare in the markets earlier this week. The calculus was that the First Republic, while weak, was still viable. As such, Fed or government action could be seen as overreacting and hampering private sector solutions, which would be the preferred outcome.

Last week, for example, senior officials in the Biden administration spoke to billionaire Warren Buffett as the banking crisis deepened. It was not immediately clear what was being discussed; Mr. Buffett did not respond to requests for comment and the Treasury Department declined to comment.

On Sunday, House Financial Services Committee Chairman Patrick McHenry (R., NC) told CBS News that big U.S. banks buying up smaller troubled lenders is a possible solution to ensure Americans maintain confidence have in the financial system.

“I think all options should be on the table. That’s what I’m considering legislatively, that’s what I would also recommend the administration consider,” Mr McHenry said.

Although policymakers favor private action, calls for bolder, more comprehensive moves continue, particularly in relation to bank deposits. On Friday, the mid-size bank Coalition of America asked regulators to immediately guarantee all deposits in the US for two years. In a letter, the group said deposits are leaving banks of all sizes and flowing into the four largest banks, putting all at risk of a bigger panic.

“Should another bank fail, it is very likely that customer panic will trigger a series of defaults due to deposit bank runs, regardless of the financial health of the underlying banks,” the group wrote.

—Nick Timiraos, Andrew Restuccia, Rachel Louise Ensign, Ben Eisen, and AnnaMaria Andriotis contributed to this article.